If you’re thinking about making some extra money, stock trading might be a great option. But the problem is that today’s investors and traders have access to numerous types of trading instruments, which might get you lost in the middle of the way, so learning about them is of the utmost importance.
From trustworthy blue-chip stocks to the fast-paced futures and foreign exchange (or forex) markets, traders often compare forex vs stocks to determine which market is the best one to trade. In this comparison, keep in mind that there will always be benefits and drawbacks for each one and it ultimately comes down to how important those features affect you, personally. Deciding between one of them can be a real pickle, but don’t worry! In this article, we’ll make sure you’ll learn everything you need to know before making a wise decision. So, let’s start with the basics:
The Basics
The foreign exchange market, a.k.a. forex, is the world’s largest financial market. The main thing about Forex is that it’s decentralized and mostly represents a trading network of participants from around the world, including investment banks, central banks, hedge funds, and commercial companies. Many traders prefer the forex market because of its high liquidity, the nonstop trading, and the amount of leverage that is offered to participants.
On the other hand, the stock market is made by well-established and financially sound companies. As you may already know, the shares in a company, as the name suggests, offer a share in the ownership. These equities operate profitably during challenging economic conditions and have a history of paying dividends. Most of the time, these transactions are conducted on stock exchanges, in order to raise capital. Although the stock exchanges might provide a transparent, regulated, and convenient marketplace for buyers to conduct business with sellers, it’s generally considered to be less volatile than many other investments and are often used to provide steady growth potential to investors’ portfolios.
Now that you know what trading is all about, especially when it comes to these two markets, let’s compare them on a more technical level.
Forex vs Stock Market
Size
One of the biggest differences between forex and stocks is the sheer volume of the forex market. A high volume means traders can typically get their orders executed more easily and closer to the prices they want. For example, the forex market volume dwarfs the dollar volume of all the world’s stock markets combined, which averages roughly $200 billion per day. Why do we care? Because the greater the size, the greater the liquidity will be, so, here Forex takes the wins.
Liquidity
As we mentioned above, a market that trades in high volume generally has higher liquidity. Liquidity leads to tighter spreads and lower transaction costs. Forex major pairs have extremely low spreads and transaction costs when compared to classic stock action. This ends up being one of the major benefits of trading on the forex market.
Volatility
This is a measure of short-term price fluctuations. Many traders, especially the short term ones, rely on volatility to make their investments in order to profit from quick price swings in the market. This is an advantage that attracts many investors to the forex markets. Others are more comfortable with less volatile and less risky investments, like buy-and-hold investors, who may prefer the stability offered by the classic stock trading market.
Leverage
Another big advantage of Forex trading is the superior leverage offered by that market. In the US, investors generally have access to 2:1 leverage for stocks. The forex market offers a substantially higher leverage of up to 50:1, and in other parts of the world, even higher leverage is available. Of course, this offers the convenience of being able to command a larger position for a given cash deposit, but be aware! Leverage can be a powerful tool but it can also put a quick stop to your activities.
Trading Hours
Trading sessions for stocks are limited to exchange hours, therefore, stock traders must adhere to the hours of the stock exchange. On the other hand, Forex is a 24-7 market, and it has no single central location! Participants can be spread across the globe and there is always a part of the market that is in business hours. Add that to the efficient forex trading apps that are available on the market, and you can even invest on the go, effortlessly! If you’re interested in knowing which are the best apps for that, click here. The catch is that extended trading sessions remain notably low volume and non-liquid. When comparing volumes across a 24-hour period, Forex has the upper hand.
So… Which One?
The Internet has opened up major possibilities when it comes to trading. The decision is usually based on risk tolerance, account size, and convenience. But in the end of the day, you must choose what works best for you! It often comes down to knowing which trading style suits you best. The instrument a trader uses should fit on his strategies, goals, and outcomes he or she wants to overcome. However, if your strategy is to buy and hold for the long term, generating steady growth and earning dividends, stocks are a more practical choice.
